Brad Wiskirchen

Chargebacks: The sneaky holiday hangover

chargeback processSimilar to the current tax code, today’s chargeback process is convoluted, antiquated and subjective. But action is afoot to streamline the process, shorten the resolution time and protect everyone involved in the chargeback funnel from both criminal and friendly fraud.

Chargebacks have been around for more than 40 years since the Fair Credit Billing Act was passed to protect the rights of consumers.  A lot has changed in the past 40 years – including the emergence of ecommerce, mobility and digital currency. Retail has been greatly influenced by these market changes and will continue to evolve as new technology is introduced and payment options expand.

While the markets have evolved with the adoption of technology, the chargeback process has remained consistent but cumbersome, especially for merchants.  With the increase in fraud, chargebacks influence every part of the retail funnel, threatening the profitability (and in some cases livelihood) of retailers; adding time intensive and expensive processes to the plates of the credit card companies and banks; and even hurting the very buyers that this system was created to help.

The problem with chargebacks for merchants is rooted in issuing banks’ and credit card companies’ desire to keep the cardholder happy, most often requiring very little proof from cardholders to validate a dispute claim. This emphasis by the issuers on the satisfaction on the consumer, while crucial in the grand scheme of things, also places the onus on the merchant to disprove a dispute in accordance with the issuers defined policies.

According to the recently-published State of Chargebacks Report, which provides an overview view of the state of fraud and chargeback management in the card not present (CNP) channel today, a shocking 82 per cent of organizations are currently disputing chargebacks. The more than one thousand respondents representing organizations of all sizes and across many industries shared their experience, insights and performance related to managing risk and chargebacks for online and mobile commerce.

And, while participating merchants and their industries all report fraud, and resulting chargebacks, as a major issue, their individual issues and the source of fraud vary from industry to industry. Nearly one-half, or 48 per cent, of organizations surveyed stated the primary source of the chargebacks they receive is transaction or CNP (online) fraud, while 28 per cent say “friendly fraud” is the biggest source of chargebacks.

Specifically, travel and leisure and education industries report CNP fraud is the primary source of their chargebacks, whereas more than half of dating and download/streaming businesses acknowledge most of their chargebacks result from friendly fraud – when consumers deliberately take advantage of the chargeback process by claiming legitimate purchases are actually fraudulent. Sadly, friendly fraud has become all too easy, and consumers are more comfortable calling and disputing a charge today than ever before.

Although many are fighting chargebacks, other survey results indicate organizations may lack expertise or struggle finding success with the re-presentment process. The two biggest issues businesses face when dealing with chargebacks are: disputing them (otherwise known as re-presentment – at 59 per cent) and being able to specifically identify instances of friendly fraud (58 per cent of merchants).

Brad Wiskirchen

Surprised that people can’t determine if their fraud is friend or foe? Don’t be: in addition to not being up on the initial fraudulent activity, 12 per cent of overall merchants did not know the cause of the majority of their chargebacks, and almost one-tenth (more than eight per cent) of merchants surveyed overall were not aware if their organizations performed charge back re-presentment at all. When asked about their chargeback revenue recovery win-rate, respondents were most likely to state they had no clue what their actual win rate was (24 per cent).

For those in the know, more than one-tenth (11 per cent) definitively state they do not dispute chargebacks, opting to take the financial hit than attempt to recoup false losses. Low win rates, additional operational requirements, and the overall burden of conducting the tedious process are all key challenges. Friendly fraud is also a major source of frustration, as merchants struggle to cope with dishonest customers and a payment chargeback system that favors cardholders over merchants.

Other overall challenges cited by the survey respondents include:

  • Reducing chargeback rates (50 per cent)
  • The balancing act of reducing fraud and chargebacks without negatively impacting sales or causing false positives (42     per cent)
  • The cost of chargebacks (39 per cent)
  • Lack of expertise or strategy with chargeback management (21 per cent)
  • Not having enough resources (21 per cent)

Getting to the root of the problem

Getting to the root cause of chargebacks is critical and, while respondents definitively identified CNP fraud and friendly fraud as the two primary sources, there is a persistent lack of knowledge about the breakdown, additional sources, the measures being taken to combat fraud and chargeback actions and success rates. This dearth of knowledge shines a light on a major hole in the retail industry – one that affects the entire payments ecosystem, from payment processors and banks down to the consumer – that must be filled before we can successfully fight fraud. If merchants are not able to properly detect the key issues and their surrounding circumstances, they will have a hard time identifying how to reduce both fraud and chargebacks.

The good news is that businesses are beginning to heed the warning. 45 per cent of respondents reported engaging a third-party solutions provider to fight fraud, with the majority of organizations surveyed (88 per cent) employing multiple features and technologies for fraud and chargeback prevention. The sobering reality is that it’s the merchants with higher online revenues that are employing these tools and technologies, leaving the long tail (and consumers who want to support startup retailers and smaller shops) vulnerable.

Whether it’s reducing chargebacks, balancing risk management with sales conversion or finding the resources and expertise to manage chargebacks, there are myriad of potential challenges an organization may face.

What does this mean for banks?

While conventional wisdom may say that merchants – not banks – get the short end of the proverbial stick when it comes to chargebacks, banks must take on the unfortunate role of the ‘heavy’ when it comes to fraudulent activity. As banks step in to be the enforcer or middle man between consumers and merchants, the relationship between the banks and their two key constituencies feels the strain.

What can you do to alleviate this? Banks traditionally haven’t had access to the right information to be able to validate a purchase and determine if a disputed charge was fraud or simply a customer feeling buyer’s remorse. As merchants increase their level of fraud-fighting sophistication and intelligence with the adoption of machine learning solutions, banks should be encouraged to work directly with them to resolve claims rather than silo the communication to the banks and its customers. As a result, legitimate claims will be more easily resolved and all parties in the retail funnel can lessen the negative side effects of chargebacks.

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